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PowerPoint Slideshow about 'THE ABCs of PDPs' - adamdaniel

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The airframe manufacturer owns the aircraft and has a confidential arrangement with its airline customer.

Confidentiality, control over delivery slots and aircraft pricing are the key drivers for the manufacturer, which typically requires the right to buy-out the lender in a default scenario and imposes certain limitations on transfer of the asset

In many cases the engines are subject to a different purchase contract, which must also be assigned and consented to by the engine manufacturer.

The purchase contract and related equity PDPs, which have been partially assigned as security, form part of the debtor’s estate.

Upon filing by an airline of a bankruptcy petition under Chapter 11, the lender will be stayed from foreclosing on, or stepping into, the purchase agreement. In addition, the manufacturer will be stayed from terminating the purchase agreement itself.

Section 1110 of the Bankruptcy Code, which mandates the expiration of the automatic stay for aircraft after 60 days, does not apply to general intangibles such as the purchase agreement rights.

If an airline rejects the purchase contract as it relates to an aircraft, either the manufacturer will move to terminate or the lender will move to exercise remedies.

The lender’s exercise of remedies will trigger the manufacturer’s buy-out option. If it is not exercised, the lender will be bound to purchase the Aircraft.

The lender should get credit for airline PDPs if properly pledged and not subject to set-off.

Until foreclosure occurs and the interest of the airline in the purchase contract is extinguished, the airline can theoretically make a claim for the return of its paid-in PDPs if manufacturer or lender oversecured (claw back issue).

An “assumption” by the lender of the purchase contract pursuant to pre-negotiated agreements technically remains subject to the airline’s equity of redemption until a proper foreclosure is conducted.

If no foreclosure is completed, the lender may still take delivery of the aircraft as mortgagee-in-possession by putting up the purchase price. Any surplus would go to the airline.

If a foreclosure has properly been conducted, the proceeds of the foreclosure sale would similarly flow through the waterfall. The owner of the purchase agreement would then be free to sell on the purchase agreement (subject to transfer limitations) or to take delivery of the aircraft by putting up the purchase price.

Manufacturer must have “one master”. Airline before EOD, Lender after EOD.

Airlines need the flexibility to adapt the aircraft and lenders usually are willing to accept some fluctuation so long as the lender’s purchase price is not increased by more than an agreed cap.

Lender’s consent is nevertheless required for major changes that have an impact on the nature or value of the collateral, such as a change in aircraft type, cancellation of a delivery slot or amending the PDP due dates or scheduled aircraft delivery dates.